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Reform Of The Prepaid Card: Good Intentions Gone Bad

April 10, 2012
Tim Sloane
Mercator Advisory Group
Reinvestment Partners ignores the value of prepaid debit cards and focuses instead exclusively on cost. As with other consumer groups, Adam Rust, Director of Research at Reinvestment Partners, has issued a press release and a new report that promotes principles that are only valid when it is assumed that these cards are comparable to a bank account – but they aren’t because prepaid debit cards offer greater liquidity and convenience and are also available to individuals shunned by traditional financial institutions. Rust is quoted in the press release:

“Until all prepaid cards are safe, affordable, and fully functional," says Adam Rust, Director of Research at Reinvestment Partners, "they will still be a less-than-optimal substitute for a regular checking account. The reformed prepaid card will give consumers the services they need while protecting them from excessive fees, high-cost credit, and confusing disclosures."
What Rust means by “safe, affordable, and fully functional” is confusing in that Mercator consumer research, as well as research performed by others, clearly indicates cardholders are extremely happy with the prepaid debit cards they have so these cards appear to be functioning perfectly for those that like them. This should come as no surprise in that funds can be deposited on these cards and cash withdrawn at far more locations than associated with bank branches or bank ATMs.

Indeed, research I conducted and published in the report “Grasping the Benefits of Prepaid: A Battle Plan for Banks” shows that for three zip codes in the low and moderate income neighborhood of Stockton California, there were more than four Green Dot locations for every one Bank of America location, and there wasn’t one credit union to be found.

Rust also brought up the issue of credit associated with prepaid debit cards:

No credit: Until recently, one bank offered a line of credit with an APR of more than 120 percent on its prepaid cards. That is not right. The prepaid card should be a safe harbor from high-cost credit and from any overdraft penalties.
Rust is willing to eliminate the ability for those with low and moderate income to get the credit they need because of one solution that was, from his perspective, overpriced. I say “from his perspective,” not because I believe the fees charged were low, but only because the fees were lower than those charged by most pay day loan stores. I would advocate more loans be made available to those with low and moderate income, through any avenue, as long as the rate is fair and has controls that assure the consumer won’t enter a spiral of loans used to pay each other off – but then these are principles that are already well know and promoted by others.

The one area in this press release that makes perfect sense is the recommendation that disclosures be made in a form that enables easy comparison of the products:

They should have clear and complete disclosures that share common terms with other cards so that consumers can comparison shop for their card that bests suits their needs.
But this isn’t new. The idea has been promoted for years by the NBPCA, which has a Disclosure Policy, and by CFSI, which recently made specific recommendations for a fee box that is in pilot testing with several prepaid program managers, including Green Dot.
 

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